2006 Shareholder Letter Summary

The 2006 letter is Berkshire's most expansive global year. An 18.4% gain in per-share book value — a record $16.9 billion dollar gain in net worth for a single American company — arrives amid an extraordinary insurance tailwind (Mother Nature "went on vacation") and two landmark acquisitions: ISCAR, Berkshire's first foreign-headquartered business, and TTI, a Fort Worth electronics distributor. The letter closes the Gen Re derivatives chapter, formalizes the investment succession plan by publicly announcing a search for a Chief Investment Officer, and delivers a sustained philosophical assault on the 2-and-20 hedge fund fee structure. In every dimension, 2006 is the year Berkshire proves that great businesses, left alone, compound relentlessly.

Historical Stats

Book Value Gain: 18.4% ($70,281 vs. $59,377 per A-share)
Net Worth Increase: $16.9 billion — cited as the largest single-year net worth gain in U.S. corporate history (excluding merger-driven boosts)
S&P 500 Return: +15.8% (Berkshire outperformed by ~2.6 points)
Float: $50.9 billion (year-end). The Equitas retroactive reinsurance deal added another ~$7 billion post-year-end.
Insurance Underwriting Profit (2006): $3.838 billion total (vs. $53M in the hurricane-ravaged 2005)
- General Re: $526M profit (vs. $334M loss in 2005)
- B-H Reinsurance (Ajit Jain): $1.658B profit (vs. $1.069B loss in 2005)
- GEICO: $1.314B profit (vs. $1.221B in 2005)
- Other Primary: $340M profit
Per-Share Investments: $80,636 (from $4 in 1965; CAGR 27.5%)
Pre-Tax Earnings Per Share (Non-Insurance): $3,625 (from $4 in 1965; CAGR 17.9%)
Non-Insurance Pre-Tax Earnings Growth (2006): +38% vs. 2005
Acquisitions: ISCAR (80% for ~$4B), TTI ($1.3B in sales, private deal), PacifiCorp (completed), Business Wire, Applied Underwriters; tuck-ins at Fruit of the Loom (Russell Corp ~$1.2B), Shaw, MiTek, CTB, Clayton
Foreign Currency Gains: ~$186M pre-tax in 2006; $2.2B cumulative since 2002
NetJets: Swung to $143M pre-tax profit (from prior losses)
Clayton Homes: $513M pre-tax (plus $86M Berkshire financing fee)
Gen Re Derivatives: Final year. Cumulative pre-tax loss since wind-down: $409M. Only $5M loss in 2006.
Federal Income Tax Paid: ~$4.4 billion
HQ Employees: 19 people (Omaha). Total employees: 217,000.

🏢 Corporate Performance & Operations

GEICO — The Tony Nicely Miracle

Policies-in-force grew from 5.7M (2003) to 8.1M (2006) — a 42% increase — while headcount fell 3.5%. Productivity up 47%.
Ad spend grew from $31M (1995, when Berkshire took control) to $631M. GEICO now spends more on advertising than any competitor, including much larger ones.
Underwriting profit: $1.314B. Float: $7.171B.
Buffett's tribute: "What management accomplished there was simply extraordinary."

ISCAR — First Foreign Acquisition

Acquired 80% for $4 billion on July 5th, 2006. Wertheimer family retains 20%.
Origin story: A 1¼-page letter from Eitan Wertheimer in October 2005. "Character and talent just jumped off the page."
Products: Small, consumable cutting tools used with large machine tools — a "business without magic except for that imparted by the people who run it."
Jacob Harpaz (CEO) and Danny Goldman (CFO) visited Omaha in November 2005 before the deal closed.
Buffett and Munger visited Israel in September 2006: "We — every one of us — have never been more impressed with any operation."

TTI — The Buyer of Choice in Action

Paul Andrews Jr. built TTI from $112,000 in sales to $1.3B over 35 years. Sold to Berkshire in a pre-lunch handshake on November 15th.
Andrews rejected "strategic" buyers (fear of synergy-driven dismemberment) and private equity (fear of debt-loading and fast flip). "That left Berkshire."
Deal originated through John Roach (former Justin Industries), demonstrating the power of the Berkshire relationship network.

Equitas / Lloyd's — The Retroactive Reinsurance Deal of a Lifetime

Berkshire agreed to accept all future claims on Lloyd's pre-1993 policies in exchange for $7.12 billion in cash and securities (instant float).
Coverage limit: $13.9 billion — $5.7 billion above Equitas's estimated total liability.
Liabilities include asbestos, environmental, and product claims stretching 50+ years into the future.
Annual DCRA amortization charge will increase to ~$450M/yr after the deal; Berkshire's underwriting elsewhere must clear this hurdle for float to remain cost-free.

General Re — Rebuilt and Profitable

$526M underwriting profit in 2006 (first fully profitable year in the post-2001 rebuild era).
Float: $22.827B. Leadership: Joe Brandon and Tad Montross.

MidAmerican Energy — Utility Compounding

86.6% Berkshire-owned (with partners Walter Scott, Dave Sokol, Greg Abel).
Combined earnings before interest and taxes: $1.718B (vs. $1.168B in 2005).
PacifiCorp acquired (completed March 21, 2006) — adds western U.S. electric customers.
HomeServices profit fell 50% due to housing market slowdown and "dumb lending" overhang.

Buffalo News — The Newspaper Elegy Begins

Buffett delivers the most thorough autopsy of the newspaper business model in any letter to date.
Competitive monopoly advantage ("Survival of the Fattest") has been permanently undermined by cable, satellite, and the internet.
The online version of a newspaper "is at best a small fraction" of the economic value of its print predecessor. Fixed costs are high; unit volume declining.
Stan Lipsey and editor Margaret Sullivan praised for maintaining the News's leadership penetration despite structural headwinds.

NetJets — The Turnaround

Worldwide pre-tax profit: $143M (vs. chronic prior losses). European operation swung to breakeven after 589 new customers added in 2005–2006.
Rich Santulli and Mark Booth credited for the turnaround.
Fleet managed by NetJets is now larger than next three competitors combined.

Core Themes & Insights

🌍 The "Buyer of Choice" Goes Global

The Philosophy: Berkshire's most durable competitive advantage in acquisitions is not price or scale — it is reputation. Owners who care too much about their businesses to put them up for auction approach Berkshire first. ISCAR (filtering out all auction-seekers) and TTI (filtering out strategic buyers and PE) are the purest examples. The Insight: This "filter" — caring enough not to auction — also selects for the quality of post-sale management. The managers who pass through this filter are the same managers who made the businesses excellent in the first place. The Quote: "There is something going on in their brain that says this business is so important... that we actually care about the home in which these businesses reside."

🐝 The 2-and-20 Takedown: The "Gotrocks" Revisited

The Philosophy: The 2% annual fee + 20% carried interest structure mathematically guarantees that, in aggregate, investors in such arrangements underperform the market. A manager generating 10% gross keeps 3.6 percentage points in fees; the investor nets 6.4%. Meanwhile, an index fund may return 15% at near-zero cost. The Insight: This is the purest distillation of Buffett's career-long argument that investment industry costs are the only guaranteed "return" in finance — every dollar in fees is a dollar permanently removed from the compounding engine. The Quote: "The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these 'hyper-helpers.'"

See Walter Schloss as the counter-example: 47 years of partnership, no fee unless investors profited, outperformed the S&P dramatically.

📰 The Newspaper Obituary: "Survival of the Fattest" is Over

The Philosophy: Newspapers derived extraordinary profitability from local advertising monopoly in cities where competition had been eliminated. This monopoly had nothing to do with editorial quality — it was purely structural. The internet eliminates the structural advantage. The Insight: Talented management can "slow the rate of decline" in a deteriorating business, but cannot reverse it. The principle generalizes: even excellent people cannot manufacture returns from a collapsing economic model. The Modern Relevance: The newspaper analysis is a twenty-year-ahead diagnosis of what would happen to every legacy media business. Buy the business, not the headline.

🔬 The Investment Succession Framework: Searching for the CIO

The Philosophy: The CEO succession plan (three internal candidates, board-approved) is settled. The investment succession is not. Buffett publicly announces a search for a younger Chief Investment Officer to manage an increasing portion of Berkshire's portfolio. The Criteria: Genetic aversion to risk ("programmed to recognize and avoid serious risks, including those never before encountered"); temperamental independence and emotional stability; understanding of human and institutional behavior. IQ is explicitly secondary. The Quote: "Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions."

🏦 Equitas: Float as the Art Form

The Philosophy: Retroactive reinsurance — insuring already-occurred losses whose magnitude is unknown — is the most sophisticated expression of Berkshire's insurance edge. Only a company with Berkshire's balance sheet can credibly offer 50-year guarantees to Lloyd's names. The Insight: The $7.12B in immediate float, invested over 50 years, will (if modeled correctly) more than offset the future claims obligations. The deal is profitable only if Berkshire's investment returns exceed the amortizing liability. This is Ajit Jain's skill translated into structured finance.

See Ajit Jain, Float, Retroactive Reinsurance.

💰 2006 Shareholder Letter: "The World Opens Its Doors"

"More and more, Berkshire has become 'the buyer of choice' for business owners and managers. Initially, we were viewed that way only in the U.S. Now, last year, our globe-trotting finally got underway." — Warren Buffett, 2006

🎭 The Narrative Context

The 2006 letter is the most confident document Buffett has ever signed. A record $16.9 billion gain in net worth, an insurance year that could not have been scripted better (no catastrophes, unprecedented underwriting profits), and the close of Berkshire's first major international acquisition — the Israeli cutting-tool maker ISCAR — all arrive simultaneously. Buffett does not wallow in the good fortune; he uses it to advance the philosophical argument he has been building for decades. A benign year is not a reason to relax. It is a reason to deploy capital at scale, find new elephants, and ensure the compounding engine is correctly designed for the next forty years.

Beneath the record numbers lies a structural transition. Berkshire is no longer principally a U.S. insurer-conglomerate. It is becoming a global capital allocator with operating businesses in 61 countries (through ISCAR), regulated utilities in six U.S. states and the UK, and a stated willingness to write multi-decade guarantees for the oldest insurance market on earth (Lloyd's). The succession plan, articulated yet again, has now split into two tracks: the cultural track (CEO) and the investment track (CIO). The 2006 letter acknowledges publicly, for the first time, that Buffett himself cannot fill both roles indefinitely.

💡 Philosophical Gems

The Philosophy: "The Auction Filter"

The Logic: Businesses that come to Berkshire without an auction process are self-selected for quality. Owners who care enough about their employees and business culture to choose a buyer over maximizing the sale price are, by definition, the same people who built something worth preserving.
The Discipline: Berkshire has never bought a major business via competitive auction. This is not a constraint — it is an acquisition strategy. The non-auction filter eliminates most mediocre sellers and most mediocre managers simultaneously.
The Quote: "The people that pass through that filter of caring enough about their business that they don't simply put it up like a piece of meat at an auction are also the people, in our view, that make the best managers and make the best partners over time."

The Philosophy: Walter Schloss and the Death of EMT

The Logic: The Efficient Market Theory (EMT) holds that public information is always priced correctly. Walter Schloss, working from a single-room office with one file cabinet and no secretary, produced 47 years of market-beating returns using only publicly available statistical analysis. This is not a fluke; it is a systematic refutation.
The Discipline: The academic community, confronted with Schloss's record, did not update their model. They ignored the evidence. "Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope."
The Quote: "He built this record by investing in about 1,000 securities, mostly of a lackluster type. A few big winners did not account for his success. There is simply no possibility that what Walter achieved over 47 years was due to chance."

The Philosophy: Float as a 50-Year Loan at Negative Cost

The Logic: The Equitas deal gives Berkshire $7.12 billion today to invest, in exchange for paying claims of unknown magnitude over the next 50+ years. If Berkshire's investment returns exceed the amortizing liability, the float costs less than zero — meaning Berkshire is paid to hold the capital.
The Discipline: This is the float thesis in its most extreme form. National Indemnity was purchased for $8.6M in 1967 with $17M of float. By 2006, float was $50.9B — and the Equitas deal added $7B more. The compounding of float is the engine behind Berkshire's long-term performance advantage.
The Quote: "Scott Moser, the CEO of Equitas, summarized the transaction neatly: 'Names wanted to sleep easy at night, and we think we've just bought them the world's best mattress.'"

The Philosophy: "Genetically Programmed" Investment Risk Management

The Logic: Buffett's articulation of the ideal CIO is an implicit critique of finance-industry hiring practices. The best investment risk manager is not the highest-IQ candidate or the candidate with the best recent track record — it is someone whose temperament makes catastrophic risk instinctively aversive.
The Discipline: "Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions." Models fail precisely when they are most needed (in tail scenarios). Judgment, not modeling, is the final defense.
The Insight: This is the most direct statement of Berkshire's anti-quant philosophy. It applies not only to hiring but to every investment decision Berkshire makes.

The Philosophy: Newspaper Economics — The Last Chapter

The Logic: The newspaper monopoly was not a product of editorial virtue — it was a product of advertiser circularity (readers follow ads, ads follow readers) and the absence of competition. When the internet provided an alternative network for both readers and advertisers, the structural moat was gone overnight.
The Discipline: "Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed." The thought experiment is devastating: the moat was never the product, it was the distribution network.
The Quote: "The days of lush profits from our newspaper are over." Written in 2006, 16 years before the Buffalo News was ultimately donated to a local nonprofit.

🗣️ Verbatim Masterclass

"Our gain in net worth during 2006 was $16.9 billion... we believe that is a record for a one-year gain in net worth by any American business."
"If you want to get a reputation as a good businessman, be sure to get into a good business." (quoting "a wise friend" — on why newspaper talent can't save a declining model)
"Though American Airlines (with its 'miles') and American Express (with credit card points) are credited as trailblazers in granting customers 'rewards,' Charlie and I were far ahead of them... we jumped into the reward business by buying Blue Chip Stamps. Sales then fell another 98%." (self-deprecating Blue Chip postscript)
"Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who have lacked these virtues."
"Charlie and I are extraordinarily lucky. We were born in America; had terrific parents; have enjoyed wonderful families and great health; and came equipped with a 'business' gene that allows us to prosper in a manner hugely disproportionate to other people who contribute as much or more to our society's well-being. No wonder we tap-dance to work."

🔗 Evolutionary Links

Entities: GEICO, Tony Nicely, ISCAR, Eitan Wertheimer, Jacob Harpaz, Ajit Jain, General Re, Joe Brandon, Tad Montross, TTI, Paul Andrews Jr., Equitas, MidAmerican Energy, David Sokol, Greg Abel, Walter Scott, NetJets, Rich Santulli, Clayton Homes, Kevin Clayton, Buffalo News, Walter Schloss, Susan Decker, Lou Simpson, Charlie Munger
Concepts: Float, Retroactive Reinsurance, Buyer of Choice, Insurance Principles, Manager Autonomy, Succession Planning, 2-and-20 Fee Structure, Efficient Market Theory, Dollar Devaluation Thesis, Circle of Competence, Newspaper Economics, Owner's Manual Principles, Corporate Governance

[!TIP] The 2006 letter is the inflection point where Berkshire's "buyer of choice" reputation formally becomes a global moat. ISCAR proves that a business owner in Israel, having never met Buffett, will choose Berkshire over every investment bank offering a higher price — purely on the basis of cultural reputation. This compounding of trusted relationships is the intangible that no balance sheet captures. The Equitas deal simultaneously demonstrates the complementary moat: Berkshire's financial strength is so extreme that it can write 50-year guarantees that no other institution on earth can credibly offer. Two moats, one year.

See also: 2006 Meeting, 2005 Letter, 2007 Letter